How to budget: 5 steps

8 min read

Updated: Oct 2, 2026

Written by

Emily Tye

Reviewed by

Amy Lancashire

A budget is a plan for your money: what comes in, what goes out and what's left over. It only works if it covers everything you spend, including the costs that don't turn up every month.

To make a budget:

1. Work out your monthly take-home pay

2. List your regular spending: everything that goes out every week or month

3. Add up your irregular costs, like the TV licence and Christmas, and divide the yearly total by 12

4. Take Steps 2 and 3 away from your take-home pay

5. Give every pound left over a job, starting with emergency savings

If you're budgeting for children or on student finance, our guides on creating a family budget and budgeting as a student cover what's different.

Step 1: Work out your take-home pay

Start with what actually lands in your account, after tax, National Insurance, pension contributions and any student loan repayments. Add every regular source of income, such as wages, benefits, child maintenance and money from a side job.

If you're not paid a fixed amount every month, budget on the smaller figure:

• Paid weekly: use 4 pay packets as your monthly income. There are 52 weeks in a year, so this leaves at least 4 paydays a year you haven't budgeted for.

• Paid every 4 weeks: use 1 pay packet as your monthly income. You'll usually get 13 paydays a year, so in at least 1 month you'll be paid twice.

• Pay that changes month to month: use your lowest month from the past year.

Put the extra paydays, and anything you earn above your lowest month, straight into savings or your irregular costs pot (see Step 3). Planning on the smaller figure means a quiet month doesn't break your budget, and a good month puts you ahead.

Step 2: List your regular spending

This step is for everything that goes out every week or every month. Go through your last 3 months of bank and credit card statements and write down each regular cost. For anything that changes from month to month, like food shopping or fuel, add up the 3 months and divide by 3.

Sort what you find into 3 groups:

1. Bills: payments you've agreed to make, usually on a set date each month, like rent or mortgage, council tax, gas and electricity, water, phone, broadband, insurance you pay monthly and subscriptions.

2. Everyday spending: day-to-day costs that change from week to week, like food, fuel or bus fares, toiletries, eating out and nights out.

3. Debt repayments: credit cards, loans, overdrafts and buy now, pay later. Note: If you pay for things on a credit card, list what you bought under bills or everyday spending, not the card repayment, so each purchase is only counted once. If you're paying off a balance you already owe, what you put towards that balance goes under debt repayments.

Step 3: Add up your irregular costs

This step is for costs you know are coming but don't pay every month. Go through your statements or transactions for the past year to catch everything you pay for.

Common irregular costs include:

• TV licence, if you pay it in one go

• Car costs, like an MOT, servicing and tyres, plus road tax or insurance if you pay them yearly

• Christmas, birthdays and other celebrations

• Holidays

• Dentist and glasses

• Annual memberships and subscriptions

• School uniforms and trips

Add up the yearly total and divide it by 12. That's how much to set aside every month. Keep it in a separate savings account or pot, so it doesn't look like spending money. This is sometimes called a sinking fund.

Here's an example of how that works for one person's year:

If a big cost is due before your pot has had time to fill up, set aside more each month until then.

Does it belong in Step 2 or Step 3? 

If it comes out every week or month, it goes in Step 2. If it doesn't, it goes in Step 3. Nothing goes in both.

A yearly cost you already pay monthly, like car insurance by monthly direct debit, goes in Step 2, because it comes out every month.

Step 3 is only for costs you can predict. For the ones you can't, like a broken boiler, you need emergency savings, which come in Step 5.

Step 4: Take your spending away from your income

Add your Step 2 total to your monthly Step 3 figure, then take that away from your Step 1 take-home pay.

• Money left over: go to Step 5

• Less than £0: see what to do if you spend more than you earn, below

Step 5: Give every pound a job

Decide what each pound left over is for, or it can easily drift into everyday spending. A sensible order is:

1. Emergency savings: start with a small buffer, so a surprise cost doesn't end up on a credit card. There's more on how much to save below.

2. Expensive debt: you can put anything extra towards the debt with the highest interest rate first. Our guide on how to pay off credit card debt explains the options.

3. Savings goals: a holiday, a house deposit or a new car.

4. Everyday spending: whatever's left can go into your weekly spending money.

When every pound has a job, your take-home pay minus your plan equals £0. That doesn't mean £0 in the bank. It means every pound is planned for.

What does a monthly budget look like?

Here's an example for someone who lives alone and takes home £2,000 a month. The figures are made up to show how the steps fit together, and your numbers will be different. Costs vary a lot by where you live: our research on the cost of living alone in the UK compares 35 cities.

The bills, the card repayment and both savings pots can all go out automatically, by direct debit or standing order. That leaves £520 for everyday spending, which works out at £120 a week (£520 × 12 ÷ 52). £120 a week is easier to keep track of than £520 a month.

How do I make my budget last until payday?

Running out before payday is common. In our payday research, 2 in 5 people (40%) said they feel financially stressed in the final week before payday, and 38% said they run out of disposable income before their next pay packet.

These habits can help your budget last the whole month:

• Move money on payday. Set up automatic payments so your savings and your irregular costs pot leave the day after you're paid. Money that's already moved is harder to spend by accident.

• Line up your bills with payday. Ask your providers whether you can move your payment dates to just after payday, so bills don't come out before your pay arrives. Paying by direct debit or a CPA also means you don't have to remember due dates. In our research on missed credit card payments, a quarter of people who'd missed a payment said it was because they thought the due date was later than it was. 

• Spend from a weekly amount. Multiply your monthly everyday spending by 12 and divide by 52. If you overspend one week, you'll know in time to adjust, instead of finding out in the last week of the month.

• Check in once a week. Pick a day and spend 10 minutes comparing what you've spent with your weekly amount. If you've overspent on one thing, take it from another part of your everyday spending, not from your savings pots.

Which budgeting method should I use?

The 5 steps above give every pound a job, which is known as zero-based budgeting. You can use them on their own or combine them with one of these methods.

The 50/30/20 rule is a common starting point, but it doesn't fit every income. The same payday research found that once essential bills are paid, 28% of people are left with a fifth or less of their salary. If that sounds like you, build your budget from your own numbers and treat the 20% as something to work towards, not a rule you've broken.

What if I spend more than I earn?

If Step 4 shows a shortfall, it's better to find it on paper than at the end of the month. Work through these in order:

1. Keep up with your priority bills. Some bills have more serious consequences if you fall behind, including gas and electricity, rent or mortgage and council tax. Our guide on how to get out of debt explains which debts count as priority debts.

2. Cut what you won't miss. Check your statements for subscriptions and memberships you've stopped using, and cancel them.

3. Cut your bills without cutting back. Look for a cheaper deal when a contract ends. If you get Universal Credit, Pension Credit or other means-tested benefits, you may be able to get a broadband social tariff. These cost between £12.50 and £24 a month, but Ofcom found 70% of eligible households didn't know social tariffs existed in October 2025. Every water company in England and Wales also has a social tariff scheme for customers on a low income

4. Check you're claiming everything you're entitled to. Policy in Practice estimates £24.1 billion of income-related benefits and social tariffs will go unclaimed across Great Britain in 2025/26. A free benefits calculator can show you what you might be able to get

5. Get free debt advice if the gap won't close. If you're behind on bills, or the numbers still don't add up, you can get free debt advice from charities such as National Debtline (0808 808 4000), MoneyHelper (0800 011 3797), and StepChange (0800 138 1111). 

How much should I save each month?

There's no set amount. The 50/30/20 rule suggests putting 20% of your take-home pay towards savings and paying off debt, but that isn't realistic for everyone. A more useful target is an emergency fund. MoneyHelper suggests 3 to 6 months' essential outgoings in an instant access savings account. 

If you have expensive debt, like a credit card balance, it's usually cheaper to pay that off first and keep a small buffer for emergencies while you do. Use your essential costs from Step 2, like rent or mortgage, bills, food and travel, plus the minimum payments on any debts, to work out what that means for you. 

If that feels a long way off, a small amount you can keep up every month is better than a bigger amount you can't.

There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.